In financial markets, there are no crystal balls, only things we know and things we do not – known knowns, and known unknowns. Both can help us to guide our decisions as investors.
When faced with uncertainties or black swan events, investors have typically responded with a rush to precious metals. Gold has historically maintained its value over time, making it a form of insurance against adverse economic events that may wipe out certain sectors of the economy. When such an event lingers, investors tend to pile their funds into gold, which drives up its price due to increased demand.
Predictably, the price of gold has risen since the start of the crisis. In normal circumstances, the price of silver would rise in approximate parity with its yellow cousin. But this time it is different. The electronics sector, the biggest industrial buyer of silver, has been hit hard by the effects of the coronavirus lockdown, dampening demand. The price of silver has subsequently plummeted.
While few market gurus saw this anomaly coming, savvy traders are exploiting this divergence. The silver-gold ratio refers to how much silver is needed to purchase one ounce of gold. In 1792, the Mint Act set the ratio at 15:1. The twentieth century average was 47:1. Today, it teeters around 126:1. That’s 126 ounces of silver for one of gold. Silver prices are down three per cent this year, while gold prices are up 14 per cent. This is an unprecedented gap.
In short, silver is underperforming gold, and the former presents a potentially fruitful investment. As the electronics sector should rebound in time, the ratio should fall back as demand for silver rises. Perhaps we won’t see pre-crisis levels, but almost certainly lower than the wide gap.
Whether or not silver represents an opportunity boils down to investment horizon and personal tolerance to risk. The unprecedented nature of the event means there is no guarantee that silver will rise again. The last time the ratio was high (though nowhere near enough to be directly comparable) was in 2008. After plummeting at the start of the financial crisis, silver rose 84 per cent in value between November 2008 and 2009.
The chance to buy a safe-haven asset at a relatively cheap price is tempting, but how one approaches such a volatile market requires a plan, and both entry and exit points for your trades. At Fineco we offer two choices to help you achieve this:
A Silver ETF is a ‘safer’ investment: certainly, implementing stop losses and stop limits to restrict orders and auto sell minimises risk. But they also cover a fuller view of the market, offering exposure to silver prices through derivatives or actual stores of silver, as well as the equity of silver miners, which spreads your risk across a number of organisation’s individual performance, as well as silver prices.
ETFs can be considered more long-term, which for bears betting on a swift recovery, are a useful asset to diversify your portfolio. Silver futures, on the other hand, can leverage high bets on smaller market movements, which – in a market as volatile as present – is creating daily paydays for sharp investors.
Naturally, volatility can often equate to opportunity. But any investment, especially in a volatile market, should form one part of an overall portfolio with a complex balance of risk between both short and long term trades. Having the right partner also helps. At Fineco we have market leading commissions on the aforementioned products, as well as the broadest range of tools in the UK to help you navigate the torrid waters ahead. Might this current crisis have a silver lining?